By Mike Miles
December 2nd, 2013 | Uncategorized
Q. I have reverted back to a more conservative Thrift Savings Plan allocation: 67 percent G Fund/33 percent C Fund. I put in the maximum, including the maximum catch-up and, with match, it’s nearly $30,000 per year. My balance at 60 when I retire in five years should be between $500,000 and $600,000 depending on the return. I am estimating a 4 percent return.
I am wondering about keeping this asset allocation and taking monthly payments starting near 4 percent or slightly higher at age 60. Is a distribution with 70/30 as indicated above a bad idea? I like the conservative allocation and feel fairly comfortable with it. But some people say taking monthly payments out of TSP is a bad idea. Any suggestions?
A. It’s impossible to judge what’s best for you from the information you’ve provided. I can tell you that your asset allocation model is risk-inefficient. That is, you could achieve a higher rate of return for the risk you’re taking.
Adjusting your allocation to 20 percent C Fund, 8 percent S Fund, 2 percent I Fund, 30 percent F Fund and 40 percent G Fund will stay within your preferred 70 percent debt/30 percent equity constraint while increasing sustainable TSP lifetime withdrawal rate by about 20 percent.
Greater increases could be achieved by shifting toward more equity-heavy allocation models.
November 18th, 2013 | Uncategorized
Q. I’m 32 years old, have been contributing to the Thrift Savings Plan since 2005. I have 40 percent in my C Fund, 30 percent in S and 30 percent in I. Is this a good contribution allocation? I want to be as aggressive as possible, but I am also looking at moving most of my gains to the G Fund due to the fact the market may be headed in the same direction as 2009. If I want to protect my gains with the means of buying back at a lower price, what would be your recommendation be on rebalancing the money in my account and adjusting percentages on new money coming in?
A. You’re asking me how to implement your investment strategy. If you don’t know how to manage it, why are you using it in the first place? What do you know about that asset allocation you’re using? How is it likely to behave? What is its expected return? What is the standard deviation of those returns? How do these characteristics support or threaten your lifetime financial plan?
As I’ve pointed out many times, your question is like asking me how work the controls on your care without telling me where you are, where you want to go, what stops you want to make along the way, when you’d like to get there, what kind of car you’re driving or how much fuel you have in the tank. Your investment tactics should be based on an investment strategy which includes cash reserve and asset allocation targets, securities selection and transaction timing algorithms.
I don’t manage portfolios the way you are managing yours because there is too much uncertainty that could be avoided. The best advice I can give you is to recommend that you identify the investment allocation that will support your lifetime financial goals with a minimum of risk and then rebalance to that allocation on a regular fixed schedule — at least once per year and not more than four times per year.
November 11th, 2013 | Uncategorized
Q. I want to know what you think of two services widely advertised to federal employees. One is the Thrift Savings Plan pilot that claims to help one allocate TSP contributions in good and bad financial times with extraordinary success, and the other is a full service company offering financial and estate planning called Federal Navigator.
A. I won’t review the specific services you’ve mentioned, but I will make a couple of general comments:
Read the disclaimers for any advisory service you’re considering. A newsletter is for informational purposes only, so the publishers won’t take responsibility for the results their recommendations might produce for you. Why would you take advice from a source that abdicates any and all accountability for the results of their advice? Professionals who are licensed and paid to sell you insurance or investment products are salespeople, not advisers. Their interests are in conflict with yours, and you never know why they are recommending this or that product. Why would you trust advice from a conflicted source? I generally don’t believe that it’s smart to trust recommendations from sources without accountability or with conflict of interest, particularly not when there are more trustworthy sources available. You’ll have to do your diligence and decide for yourself, however.
October 23rd, 2013 | Uncategorized
Think you can accurately predict the future? It seems that many Thrift Savings Plan investors do. TSP-related message boards and online forums are filled with posts from participants who are obsessed with trying to position their accounts to either take advantage of, or defend against, this or that anticipated turn of events.
In some cases, this is smart; in others, it’s not. In the case of rising interest rates, for example, the current environment makes higher future rates all but certain. This unusually high probability, along with the availability of an attractive substitute for bonds in this environment, make substituting some G Fund for F Fund a smart move.
On the other hand, trying to game a congressional action — or inaction — that tends to affect various economic factors, is not so smart. Consider what you are assuming when you make anticipatory investment decisions in these cases. Market prices move in anticipation of future events. These moves are driven by the expectations of a large number of very sophisticated players — the vast majority of whom are professionals with a deep supply of resources and experience who are doing everything they can to handicap the probabilities of future events and position their portfolios accordingly. Assuming that the market will fall as a result of a future event is only a safe bet if the rest of the market’s players have failed to recognize the possibility of this coming to pass. By the time you recognize a risk, the market is likely to have done so and adjusted securities prices accordingly.
Why would an intelligent investor wait for the actuality to buy or sell when it’s in their best interest to do so before the fact? To reliably profit from predictions, you have to know important information before others.
If your financial success depends on avoiding short-term losses, you’re not doing it right. A much more reliable — and less stressful — approach is to design your investment plan from the start to tolerate the inevitable losses it will endure. I accept that certain risks are unavoidable and design investment strategies around them. Short-term loss is one such risk.
When it comes to investment management, there are only two mistakes you can make. The first is being too aggressive — that is, taking too much risk. The second is being too conservative, or taking too little risk. That sounds simple enough, but too much or too little risk compared to what?
Many investors judge the risk they perceive relative to their ideal of never suffering a loss. I can’t count the number of TSP investors I’ve interviewed over the years who’ve described their investment goal as “to make as much money as possible without ever losing money!” This is ridiculous unless your lifetime financial goals can be realized with the returns produced by the G Fund. If so, that’s where your money should be.
Most investors I’ve encountered are not in this position, however. Fulfilling their financial goals will require more growth than the G Fund can provide. And, with this additional growth potential comes the risk of short-term loss.
Ironically, what some investors do to try to shield themselves from the risk of short-term loss increases the risk of long-term failure. Assuming that your TSP is properly allocated, moving to a portfolio allocation — say, 100 percent G Fund — to anticipate a negative economic event, will mean that your portfolio is too conservative to meet your long-term needs, so you can’t stay there. If you’re wrong, you’ll miss out on gains that might be important to your long-term success.
Whether you’re right or wrong, you’ll be in a position of having to decide when to shift back to the right asset allocation model. Using this logic, you may as well have left the stock market in 1998 and not come back since — the time period during which a properly diversified and managed portfolio has doubled in value.
October 21st, 2013 | Uncategorized
Q. I’m 53 years old and plan to retire in 10 years. My current Thrift Savings Plan balance is $131,000, and I’m 100 percent allocated into the L2040 fund. I’m very aggressive in my investing. Should I allocate my TSP 60 percent C Fund, 20 percent S Fund and 20 percent I Fund instead of the L 2040 fund, which allocates in all of the funds to include the G and F funds?
A. You’re the investment manager, so you’ll need to use your process for determining the correct allocation of your TSP funds. If I were responsible for the decision, I would want quite a bit more information and analysis before deciding on the right allocation to meet your needs with a minimum of risk.
October 9th, 2013 | Uncategorized
Q. What would happen to the Thrift Savings Plan investments, specifically the G, F and I funds, if the government can’t raise the nation’s debt ceiling before the Oct. 17 deadline for default? Are we looking at another financial meltdown like we had in 2008?
A. The G Fund will hold its value. The other funds are vulnerable to loss in value. So far, however, the stock markets aren’t predicting disaster. They’re in good shape as of today – still near their multiyear highs.
You should accept that predicting future market behavior is a risky thing to do. If your financial success hinges on your ability to correctly time markets, you’re not doing it right. There are better ways to make your investment decisions. I encourage you to find one with better odds of success.
October 7th, 2013 | Uncategorized
Q. I am 64 years old with 12 years of federal service. I plan to retire when I am 66. I have done well in the L funds except in 2008. I have 80 percent in the 2020 fund and 20 percent in the 2030 fund. Should I put all of this money in the G Fund until the current financial crisis is over?
A. How you manage your account should depend upon your goals and circumstances, as well as a plan for future decision making. In general, market timing adds more risk to investment management than it avoids. It’s not part of my approach to investing, but maybe you know something that I, and most other investors, don’t. At least, you should answer the following questions before you proceed:
1. Does my current asset allocation support my short- and long-term goals with a minimum of risk?
2. Can I afford to endure short-term losses in my account without jeopardizing my long-term goals?
3. How long can I afford to sit in the G Fund before my long-term goals are threatened?
4. If I decide to move to the G Fund, and can’t afford to stay there for life, how will I decide when it’s time to get back in?
5. What will I do if my expectations about the investment markets are wrong?
These are all questions that can and must be answered to make this decision prudently.
October 7th, 2013 | Uncategorized
Q. I’m retired from the military after 28 years. I have been working for the Defense Department since March 2008 and have 17 percent going into the Thrift Savings Plan. As of right now, I have 71 percent in the C Fund and 29 percent going into the S Fund. Should I leave the contributions where they are during the government shutdown? I have friends advising me to move 70 percent to the F Fund and 30 percent to the G Fund. Not sure if that is the right move.
A. Neither of these asset allocations is remotely risk efficient. My advice is that you find a trustworthy, cost-effective financial adviser and get the job done right.
October 3rd, 2013 | Uncategorized
Q. Should I move everything to the G Fund now that we are shut down and there is the possibility that the government could run out of money within the next few weeks, forcing an unprecedented default?
A. That’s like telling me you’re driving and asking if you should hit the brakes! I don’t know where you’re going, when you need to be there, what you’re driving or how much gas you have in the tank. The person responsible for delivering you to your destination on time must make that decision based on their assessment of the situation and their knowledge of how they’ll behave down the road. If you do something now and wind up losing ground or time, will it cause a problem later? If so, will you be able to make up the lost time or resources?
If you go to the G Fund now and can’t stay there for good, when will you decide to move back out? When there’s no more risk? And, when will that be?
You should already be in the most conservative investment allocation that will support your financial goals with the minimum possible risk. If you’re not, move there without delay.
October 2nd, 2013 | Uncategorized
Q. Do you feel it would be wise to transfer my Thrift Savings Plan funds from the L2030 to the G Fund during this government shutdown? Isn’t money in the G Fund more secure, while the L2030 is prone fluctuations in the market? Is the market likely to take a big hit during the shutdown? My balance is $109,000, all in the L2030, and I still have about 20 years until retirement but may not stay federal the whole time.
A. If you want to try to time the market, you’re on your own. The safest and smartest thing to do is to figure out which investment strategy meets your needs with a minimum of risk and rebalance to it at least once per year, and not more than four times per year. If a 100 percent G Fund allocation will support your lifetime spending plan, then that’s where you should be, anyway. If not, I don’t see why you would spend any time in it.